Wouldn't mind seeing the ledger on an import tariff prior to all this as I'm curious who pays when and what to expect now.
And knowing car dealers buy vehicles prior to selling them, seems like the business fronts up the cash first. And mostly done on credit btw...
Though we are starting to have the manufacturer be the primary seller as here in Australia, is this the same in America? So a external entity would have to pay the tariff, would this come from Eurodollar accounts?
Also, what happens to the tariff paid? Is it like taxes and are deleted or do they go to consolidated revenue?
Thanks for the comment. Some interesting questions there. Unfortunately I'm not the expert on how these things are implemented; I'm just someone who's discovered an interesting economic model with some very attractive properties - particularly linearity.
Having said that, I'll reply the best I can.
I'm pretty sure you're right that an importer pays the tariff immediately on import, so it's an up-front cost, and hugely increases the risk compared to an additional tax on retail sales of imported goods. I don't know what the typical markup is on selling imported goods, but even if it were 50% of the wholesale price (excluding tariff), and there's a 100% tariff, then the tariff alone on each unsold item wipes out the retailer's *gross* profit on 2 items sold.
In your paragraph 3, are you saying that, say, Chinese car manufacturers have set up retail outlets in Australia? If so, I expect they actually set up local Australian firms, which would be responsible for paying the tariffs. If the same thing happens in the US, the firm would almost certainly have a US bank account, and pay from there.
As I understand it, a tariff is just like any other tax. I prefer to keep government and central bank separate because it seems clearer. Here's how a tax is imposed:
(Importer writes off deposits at its bank {importer's A↓, bank's L↓}; importer's bank writes off reserves at the central bank {bank's A↓, CB's L↓}; central bank creates reserves for government {CB's L↑, gov's A↑}; and government writes off importer's debt to it {gov's A↓, importer's L↓}).
I'm not sure what you meant at the beginning of your comment by "Wouldn't mind seeing the ledger on an import tariff prior to all this". Are you wondering about T accounts for the importer to represent the import of the car?
Jim Rickards has a point that there will be pressure on importers and exporters to take a hit to their margins, and not pass on the full tariff to the consumer. There will also be pressure on producers to build factories in the U.S. to avoid tariffs altogether. And to the extent that prices rise, there will be pressure on consumers to buy less. The outcome of all these various forces is, as you observe, indeterminate.
Empirically, tariffs during Tump 1 did not cause prices to rise & inflation stayed at 1.9%. A recent MIT study estimates that a 20% tariff on China will lead to a price increase in the U.S. of just 0.7%. So, the panic over tariffs causing a recession is probably overdone. Global liquidity is the bigger factor (and it's looking positive for the rest of the year) and if Trump announces a deal with China (which both sides need) then the markets are back off to the races.
Where I think Trump's team may come undone is automation - sure, factories will be built in the U.S. but they will employ robots rather than people.
Thanks for commenting! I appreciate hearing people's perspectives and real-world data.
"Jim Rickards has a point that there will be pressure on importers and exporters to take a hit to their margins, and not pass on the full tariff to the consumer."
Yes, I agree that it puts pressure on importers and their suppliers to absorb some of the hit. I just think that it's unlikely that they can absorb the whole thing, especially when we're talking about a 100% tariff. Unless they have at least a 100% markup at the moment, they simply can't do it sustainably. I expect a significant decrease in imports from China (whether from increased local production or just a drop in sales) if the tariff stays.
When it comes to recession, I'm expecting one anyway. Not because of tariffs, but because I believe that too many people and corporations have had their RNW drained away over a long period, and I don't believe it's sustainable.
With our current monetary system a recession is as certain as death and taxes, the question is, when? Some say we're already in one. That's not a hard case to make for UK/EU, but significantly more difficult for the US.
My guess, based on the real estate cycle, is that we see something come undone in 2026, perhaps second half of the year, or 2027. We usually need a good dose of irrational exuberance before a crash, and there isn't any exuberance to be found anywhere right now.
It will be interesting to watch as, unlike 2008-09, we now have central banks who are ready and willing to press the big green button on the money printer any time there's a meltdown in the banking system, which means, in theory at least, that we can't have another credit crunch. The business cycle isn't dead, but central bank intervention via QE has definitely changed the game.
I'm slightly surprised by your comment that corporations have had their RNW drained away, as some of them are sitting on huge piles of cash. Workers, for sure, have seen their incomes and wealth decline, mostly thanks to corporations that have been making out like bandits. What makes you say corporations have lost RNW?
I agree, it's not sustainable, although it can get a lot worse.
"My guess, based on the real estate cycle, is that we see something come undone in 2026, perhaps second half of the year, or 2027. We usually need a good dose of irrational exuberance before a crash, and there isn't any exuberance to be found anywhere right now."
While I largely agree that you generally need irrational exuberance before a crash, I'd say we've had that, and the crash has just been postponed by extreme interventions by the governments and CBs. Around my part of southern England, house prices have continued to soar. I've been saying for at least 18 years that they can't be sustained. I still believe that, but I realise that governments and CBs can keep delaying for ages when they decide to go all in, caring nothing for the economic damage (devastation?) they're causing. The wealthier a society starts, the longer it can be undermined before it collapses.
"I'm slightly surprised by your comment that corporations have had their RNW drained away, as some of them are sitting on huge piles of cash."
I'm more speculative in what I say in comments than in the articles, so this is more of an impression based on my experiences, and I'd be very interested to hear what you have to say. It seems we both agree that the RNW of people has taken a hit (e.g. people are having to get into more debt to own the same houses). Cash piles are all very well, but remember that, like all debts, cash and deposits add just as much to the issuer's liabilities as they do to the holder's assets. A nation's RNW is its tangible assets plus its net debt assets owed by other nations, and my impression is that both of those are decreasing - in the UK at least, even if there are some corporations which are doing well.
I suppose if you're looking at cash balances from a macro perspective, and netting them off against the debt that was simultaneously created when the money was created, then I'd have to note that no economy has any net cash balances, because the cash=debt in our monetary system, and so cash will always net off perfectly with debt. In your accounting model the mere creation of money doesn't create real wealth, as real wealth=things. I don't disagree.
In my model of the economy, wealth=purchasing power to buy real things (which are always available to buy) so money counts as wealth. So if corporations (I'm thinking large, American, mostly) are sitting on large piles of cash, that does give them the ability to buy/invest in/build real stuff. Whether they will or not is a different story. And yes, someone else, somewhere else has a monetary debt that they have to repay somehow, which is difficult if some corporation is hoarding all the cash.
And that is the paradox of our economy, which is like a game of musical chairs in which one kid is hogging all the chairs - when the music stops everyone else ends up on the floor. The lifeblood of our economy is money in circulation so that everyone gets to participate in the game, not money parked unproductively somewhere.
Wouldn't mind seeing the ledger on an import tariff prior to all this as I'm curious who pays when and what to expect now.
And knowing car dealers buy vehicles prior to selling them, seems like the business fronts up the cash first. And mostly done on credit btw...
Though we are starting to have the manufacturer be the primary seller as here in Australia, is this the same in America? So a external entity would have to pay the tariff, would this come from Eurodollar accounts?
Also, what happens to the tariff paid? Is it like taxes and are deleted or do they go to consolidated revenue?
Thanks for the comment. Some interesting questions there. Unfortunately I'm not the expert on how these things are implemented; I'm just someone who's discovered an interesting economic model with some very attractive properties - particularly linearity.
Having said that, I'll reply the best I can.
I'm pretty sure you're right that an importer pays the tariff immediately on import, so it's an up-front cost, and hugely increases the risk compared to an additional tax on retail sales of imported goods. I don't know what the typical markup is on selling imported goods, but even if it were 50% of the wholesale price (excluding tariff), and there's a 100% tariff, then the tariff alone on each unsold item wipes out the retailer's *gross* profit on 2 items sold.
In your paragraph 3, are you saying that, say, Chinese car manufacturers have set up retail outlets in Australia? If so, I expect they actually set up local Australian firms, which would be responsible for paying the tariffs. If the same thing happens in the US, the firm would almost certainly have a US bank account, and pay from there.
As I understand it, a tariff is just like any other tax. I prefer to keep government and central bank separate because it seems clearer. Here's how a tax is imposed:
https://www.economics21st.com/i/143676573/tax-imposition
(Government imposes a new debt on the importer {importer's L↑, gov's A↑}).
And here is how it's collected:
https://www.economics21st.com/i/143676573/tax-collection
(Importer writes off deposits at its bank {importer's A↓, bank's L↓}; importer's bank writes off reserves at the central bank {bank's A↓, CB's L↓}; central bank creates reserves for government {CB's L↑, gov's A↑}; and government writes off importer's debt to it {gov's A↓, importer's L↓}).
I'm not sure what you meant at the beginning of your comment by "Wouldn't mind seeing the ledger on an import tariff prior to all this". Are you wondering about T accounts for the importer to represent the import of the car?
Jim Rickards has a point that there will be pressure on importers and exporters to take a hit to their margins, and not pass on the full tariff to the consumer. There will also be pressure on producers to build factories in the U.S. to avoid tariffs altogether. And to the extent that prices rise, there will be pressure on consumers to buy less. The outcome of all these various forces is, as you observe, indeterminate.
Empirically, tariffs during Tump 1 did not cause prices to rise & inflation stayed at 1.9%. A recent MIT study estimates that a 20% tariff on China will lead to a price increase in the U.S. of just 0.7%. So, the panic over tariffs causing a recession is probably overdone. Global liquidity is the bigger factor (and it's looking positive for the rest of the year) and if Trump announces a deal with China (which both sides need) then the markets are back off to the races.
Where I think Trump's team may come undone is automation - sure, factories will be built in the U.S. but they will employ robots rather than people.
Thanks for commenting! I appreciate hearing people's perspectives and real-world data.
"Jim Rickards has a point that there will be pressure on importers and exporters to take a hit to their margins, and not pass on the full tariff to the consumer."
Yes, I agree that it puts pressure on importers and their suppliers to absorb some of the hit. I just think that it's unlikely that they can absorb the whole thing, especially when we're talking about a 100% tariff. Unless they have at least a 100% markup at the moment, they simply can't do it sustainably. I expect a significant decrease in imports from China (whether from increased local production or just a drop in sales) if the tariff stays.
When it comes to recession, I'm expecting one anyway. Not because of tariffs, but because I believe that too many people and corporations have had their RNW drained away over a long period, and I don't believe it's sustainable.
With our current monetary system a recession is as certain as death and taxes, the question is, when? Some say we're already in one. That's not a hard case to make for UK/EU, but significantly more difficult for the US.
My guess, based on the real estate cycle, is that we see something come undone in 2026, perhaps second half of the year, or 2027. We usually need a good dose of irrational exuberance before a crash, and there isn't any exuberance to be found anywhere right now.
It will be interesting to watch as, unlike 2008-09, we now have central banks who are ready and willing to press the big green button on the money printer any time there's a meltdown in the banking system, which means, in theory at least, that we can't have another credit crunch. The business cycle isn't dead, but central bank intervention via QE has definitely changed the game.
I'm slightly surprised by your comment that corporations have had their RNW drained away, as some of them are sitting on huge piles of cash. Workers, for sure, have seen their incomes and wealth decline, mostly thanks to corporations that have been making out like bandits. What makes you say corporations have lost RNW?
I agree, it's not sustainable, although it can get a lot worse.
"My guess, based on the real estate cycle, is that we see something come undone in 2026, perhaps second half of the year, or 2027. We usually need a good dose of irrational exuberance before a crash, and there isn't any exuberance to be found anywhere right now."
While I largely agree that you generally need irrational exuberance before a crash, I'd say we've had that, and the crash has just been postponed by extreme interventions by the governments and CBs. Around my part of southern England, house prices have continued to soar. I've been saying for at least 18 years that they can't be sustained. I still believe that, but I realise that governments and CBs can keep delaying for ages when they decide to go all in, caring nothing for the economic damage (devastation?) they're causing. The wealthier a society starts, the longer it can be undermined before it collapses.
"I'm slightly surprised by your comment that corporations have had their RNW drained away, as some of them are sitting on huge piles of cash."
I'm more speculative in what I say in comments than in the articles, so this is more of an impression based on my experiences, and I'd be very interested to hear what you have to say. It seems we both agree that the RNW of people has taken a hit (e.g. people are having to get into more debt to own the same houses). Cash piles are all very well, but remember that, like all debts, cash and deposits add just as much to the issuer's liabilities as they do to the holder's assets. A nation's RNW is its tangible assets plus its net debt assets owed by other nations, and my impression is that both of those are decreasing - in the UK at least, even if there are some corporations which are doing well.
I suppose if you're looking at cash balances from a macro perspective, and netting them off against the debt that was simultaneously created when the money was created, then I'd have to note that no economy has any net cash balances, because the cash=debt in our monetary system, and so cash will always net off perfectly with debt. In your accounting model the mere creation of money doesn't create real wealth, as real wealth=things. I don't disagree.
In my model of the economy, wealth=purchasing power to buy real things (which are always available to buy) so money counts as wealth. So if corporations (I'm thinking large, American, mostly) are sitting on large piles of cash, that does give them the ability to buy/invest in/build real stuff. Whether they will or not is a different story. And yes, someone else, somewhere else has a monetary debt that they have to repay somehow, which is difficult if some corporation is hoarding all the cash.
And that is the paradox of our economy, which is like a game of musical chairs in which one kid is hogging all the chairs - when the music stops everyone else ends up on the floor. The lifeblood of our economy is money in circulation so that everyone gets to participate in the game, not money parked unproductively somewhere.